MICHAEL KITCES: The No. 1 sign that an investment is riskier than it sounds is remarkably straightforward: when it offers a return that is materially higher than the returns of other investments with comparable risk.

The idea that risk and return go hand in hand is fundamental to investing, yet ignored far too often by investors. This is especially true in the realm of fixed-income investing; beware anyone who comes to the table with a high-yielding “safe” investment. After all, if the investment was really that safe while providing above-average returns, wouldn’t the company offering the investment keep it for themselves?
Remember that at the end of the day, most fixed-income investments actually represent a bond–a loan–from the borrower to the investor. When you invest in something paying 6%, it’s because you’ve loaned money to a business that’s going to be paying you 6% interest from their pockets. If the company had a way to borrow money for less, they would; when they don’t, it’s generally because they’re too risky to get access to lower interest rates, compelling them to offer a higher one. That’s the compensation for the risk being taken by the lender, but it also inherently means there is risk.